Aman ki Asha…Seize the moment

Pakistan-India trade relations have taken some big strides over the last 12 months. What appeared impossible in April 2011 is now not only possible but within grasp as the two countries have moved fast to remove some of the key barriers impeding bilateral trade.

If in April 2011, the two countries announced a roadmap to boost trade relations, the April of 2012 saw the formal opening of the trade gate at the Wagah-Attari border and New Delhi making the surprise announcement that it will allow direct Pakistani investment in India.

While India promised to resolve the issue of non-tariff barriers (NTBs) that choke Pakistani exports to its giant neighbour, Islamabad pledged to grant most-favoured nation (MFN) status to India.

But more importantly in the near-term is Pakistan’s decision to relax the constraints on Indian imports by switching to a “negative list” that bans only 1,209 items; the other 7,000-plus exportable items India can sell to Pakistan without let. Even the negative list is to be phased out by Islamabad by end-December this year. Given that till last month, Pakistan maintained a “positive list” comprising the 1,963 items that India could export, the switchover to a negative list is a huge step taken by Islamabad for the normalization of trade relations.

In the wake of this thaw in relations, both the countries hosted each other’s trade fairs with much fanfare that not only underlined the huge prospects of bilateral trade but also showed the desire for friendly ties on a people-to-people level.

With the two countries now considering relaxing visa regimes, especially for businesspeople, and allowing one another’s banks to open branches, there is lot of optimism and hope that current volumes of bilateral trade – $2.7 billion – will double or triple over the next couple of years.

In this context, the 2nd Aman ki Asha Economic Conference, planned for May 7-8 in Lahore, is likely to further crystallize and articulate aspirations of the top business and corporate leaders of the two countries. This conference aims to provide a rare independent platform where the private sector and the government representatives can interact and discuss issues that are vital to promoting economic collaboration seen by many as the most important driver for peace and stability in the region.

However, both the economic and political leaders have to be mindful of the fact that the two South Asian nuclear-armed states still have a long way to go to strengthen this fragile peace process. They need a lot of patience and determination to expand economic relations that remain vulnerable to terrorism in the near- to mid-term and to resolve protracted issues in the long-run that include the thorny problem of the divided Himalayan region of Kashmir. In this regard, such conferences and interactions are important as they manage to highlight challenges and suggest the way forward. The Aman ki Asha platform has managed to play this vital role and help nudge the two countries to bring the economy back on the agenda at a time when relations were at an all-time low following the November 2008 Mumbai terror attacks. But the two countries have moved beyond Mumbai.

The euphoria gripping many peace lovers and economic interest groups following the recent developments in the trade ties is understandable. But perhaps it is too early to celebrate as the field still remains infested by mines and there are some legitimate concerns whether Pakistan is getting a fair deal or not.

On Pakistan’s side, there are some strong voices among seasoned economists who want the government to adopt a more cautious and a slower approach while normalizing trade relations with India.

There are reasons for skepticism among various Pakistani interest groups, which overwhelmingly favour trade with India, but want the government to put the country’s interests first.

The doubts in many Pakistani minds stem from the fact that despite enjoying MFN status from India since 1995, the country has failed to get access to Indian markets due to the strict NTBs. Indian goods, on the other hand, have managed to find a sizeable market in Pakistan despite its non-MFN status.

No wonder that the trade balance remains lopsided in India’s favour. In fiscal 2010/11 Pakistan’s exports to India were around $380 million against Indian imports of $1.7 billion. Similarly, in 2009/10 Pakistan’s exports to India were $268 million against Indian imports of $1.228 billion. This trade imbalance has been similar since the mid-1990s when India granted MFN to Pakistan.

However, the trade imbalance should not be the reason to discourage Pakistan from normalizing trade with its eastern neighbour. Pakistan has a bigger trade imbalance with China, which does not mean the building of walls to block imports. That era of restrictive trade regime is gone. But while dealing with India, with which Pakistan has a bitter history and several unresolved issues, granting one-sided concessions may backfire and wipe out the gains made in recent months.

To consolidate and broaden trade relations, Pakistan must get a level playing field from India, which has a much tougher trade regime as compared to Pakistan’s liberal import policy. Pakistan’s liberal trade regime has worked in India’s advantage without even an MFN status.

Although India has promised to remove its NTBs for Pakistani goods, this is easier said than done because of the bureaucratic red-tape and slow decision-making and implementation processes. In India, both the central and state governments have to get on the same page to remove NTBs which in some cases require legislation or a change in regulations.

The expression of good intentions is not enough. One major test case in the short-term will be how fast New Delhi moves to reduce the high tariffs on agricultural commodities, textiles and other goods that comprise Pakistan’s main export basket.

The one-sided concessions by Pakistan will not help the case for durable trade ties. The Pakistan government needs to link the scrapping of the “negative list” and MFN status with the Indian decision of liberalizing its restrictive import regime. India needs to reciprocate Pakistan’s move with concrete steps.

In Pakistan, while some leading textile tycoons are bullish on trade with India and establishing commercial outlets there, others within their community are for a more cautious approach. In the short-run, definitely those Pakistani textile houses will benefit which have pre-Partition day relations and contacts in India. For others, India is likely to prove a tough market to crack.

However, it is Pakistani manufacturers who are most worried about opening the flood gate of Indian imports. The country’s automobile sector, which already has suffered due to inconsistent government policies that often allow the import of second-hand vehicles, see tougher times ahead due to trade liberalization as the Indian engineering sector is far more advanced and strong because the way it was protected by the successive Indian governments.

Imported Indian vehicles could cost less in Pakistan and benefit consumers but it may prove a big blow for Pakistani manufacturers. The government needs to safeguard Pakistani automobile sector which remains vital for expanding the country’s industrial base and its modernization.

On the other side, the Pakistani textile sector will not be the only beneficiary if it gets free access to the billion plus Indian market. Sectors including cement, information technology and pharmaceutical will gain from the improved trade relations.

The real challenge for the two governments and advocates of enhanced regional trade is to ensure that their efforts remain on course and do not get torpedoed by some unexpected turn of events that includes the threat of another Mumbai-like terror attack.

To ensure that the present gains are not lost, along with efforts to normalize trade, similar focus is needed to build greater people-to-people contacts as well as make serious efforts to resolve long-standing political and territorial disputes. This holistic approach will be the best guarantor of peace, progress and prosperity in the region. The challenge is as big and as high as Himalayas, but is there any obstacle greater than the human spirit? The Pakistani and Indian leadership have a chance to rewrite history. They must seize the moment.